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Obama’s New Budget: Why He’ll Cut Social Security & Medicare

Posted in Uncategorized, tagged , , , , , on April 9, 2013| 1 Comment »

Obama’s bargaining strategy and tactics with regard to deficit cutting over the past three years have proven to be an unmitigated disaster. From the idea of seeking a ‘grand bargain’ with Teapublicans in the House of Representatives in 2011, to the debt ceiling and sequester deals of August 2011 that resulted in $2.2 trillion in spending-only cuts and no tax hikes whatsoever on the rich, to caving in on the so-called ‘Fiscal Cliff’ this past January 1 that resulted in taxing only the richest 0.7% and allowing $4 trillion in Bush tax cuts to continue permanently—Obama’s bargaining strategy and tactics have proven a case example of exactly what not to do in negotiations.

Obama’s first error was to believe that by offering hundreds of billions in entitlement cuts back in the summer of 2011 in exchange for revenue hikes that Republicans would agree to raise taxes a mere year before the 2012 elections. Obama and the Democrats subsequently further believed that by linking $1.2 trillion in sequestered spending-only cuts in August 2011, as part of the debt ceiling deal that Republicans would not allow $500 billion in sequestered defense spending cuts take effect and would agree to some tax hikes in exchange. Obama then made the error this past December thinking Republicans would discuss tax revenue proposals after they agreed to the minimal $60 billion in Bush tax cut extensions (aka ‘Fiscal Cliff’) on January 1, 2013. Or that Republicans would have to agree to some kind of tax revenue enhancement deal on March 1 when the sequestered defense cuts would take effect, or March 27 when the government ran out of money. But the Teapublicans proved him wrong in every one of these accounts. How and why did this all happen? And will Obama and the Democrats continue to get outmaneuvered in the coming final round of deficit negotiations that commences with Obama’s latest budget, to be announced on April 10?

Some Key Questions of Strategy

The question is why have the Teapublicans agreed to the token January 1 tax hikes? Why did they agree to allow the $1.2 trillion sequestered cuts, including defense spending, go into effect? Why did they not engage in brinksmanship again on March 1 or March 27, unlike they did in August 2011? And why will they not go to the brink again on the debt ceiling issue when it arises once more in May?

The answer to the first question is Teapublicans in the House got a tax deal they simply couldn’t refuse on January 1, a deal which their big corporate campaign benefactors, the Business Roundtable, wanted and helped engineer together with the Obama administration. They got to keep $4 trillion of the Bush tax cuts, which are now permanent and which include nice ‘sweeteners’ (i.e. further tax cuts) like no more Alternative Minimum Tax and an even more generous Inheritance tax than Bush himself had introduced.

However, after having blocked with Obama prior to the January 1 deal to push through token tax hikes on only the wealthiest 0.7%, the Roundtable has since ‘switched sides’ and adopted the Teapublicans position with regard to subsequent entitlement spending cuts.

In February 2013, the Roundtable came out with its position paper on the matter of sequestered cuts and entitlement spending. It proposed to cut the social security COLA adjustment, introduce a means test for Medicare, raise the eligibility age for both Medicare AND social security to 70, and convert Medicare into a voucher system in 2022. That’s exactly the Teapublican-Paul Ryan program. With big corporate interests now in their corner firmly with regard to entitlement cuts as the primary focus of deficit cutting, why should the Teapublicans agree to any further tax hikes on the rich? And with the Roundtable and CEOs now firmly on their side, and the tax cuts successfully decoupled from the spending cuts, why should the Teapublicans go to the brink over shutting down the government on March 27? By March 1 they were already almost three-fourths of the way to the $4 trillion deficit target, with a total of $2.8 trillion in spending cuts and token tax hikes. That leaves only $1.2 trillion to go!

By letting the March 1 sequestered cuts take effect, the Teapublicans in effect did to Obama on the topic of defense spending what Obama had the opportunity to do to them on the topic of Bush tax cuts on January 1 but didn’t take. Obama could have let all the Bush tax cuts expire on January 1, and then reintroduced middle class tax cuts only on January 2. That would have put the Teapublicans in the position of having to vote down middle class tax cuts. But he didn’t, and settled for the paltry 0.7% hike on taxes on the wealthy, some of which will undoubtedly be reversed again, buried deep in the legislation, when the major tax code negotiations conclude later this year. The Teapublicans, by allowing the sequestered defense cuts to take effect on March 1, can also always reintroduce legislation piecemeal later this year to restore many of the defense cuts.

It’s not surprising that Republican Senator, Lindsey Graham, and others in Congress, in recent weeks have offered ‘deals’ amounting to another $1.2 trillion in deficit reduction. That number is not coincidental. Graham’s proposal is for $600 billion in social security and medicare cuts and another $600 billion in unspecified tax revenues. $1.2 trillion is now the remaining ‘target’ number.

To repeat: Why should Teapublicans precipitate a political crisis over the March 1 or March 27 deadlines? Why should they repeat the debt ceiling crisis on May 18? They’re winning hands down.

What Obama May Propose

Having agreed to decouple tax cuts on January 1 and having been outmaneuvered on March 1 and March 27, and with Teapublicans signaling there will be debt ceiling crisis in May, Obama has been stripped of all his leverage points in bargaining. He has no ‘stick’, only more ‘carrots’ to offer and his opposition knows it. Obama has left only the option to offer even more social security, medicare and Medicaid cuts. And throughout March he has continued to do so unilaterally once again. Not just offering once again to cut COLA adjustments for social security but to suggest his willingness to confront big cuts—in the $600 to $700 billion range—for medicare and social security and more for Medicaid. Even more specific reductions will be forthcoming in weeks to come.

But Obama has planned all along to cut social security and Medicare. He made that clear in his signing of the Bush tax cuts deal on January 2, 2013, during which he stated: “Medicare is the Main Cause of Deficits”. And again, in his February State of the Union address, Obama publicly noted he ‘liked the Simpson-Bowles’ recommendations concerning Medicare cuts.

And what are the Simpson-Bowles recommendations for Medicare cuts?

A new $550 a year deductible for Parts A and B of Medicare and provide only 80% coverage for Part A instead of the current 100% (which would require another $150-$300 a month in private insurance to cover the remaining 20%, much like Part B now). That together amounts to another $195-$350 taken out of monthly social security checks to cover, when the average for social security benefit payments is only $1100 a month today. In other words, Medicare benefits will not be cut. Its just that if seniors want to maintain current levels of benefits they’ll have to pay even more for them. Alternatively, they can choose to have fewer benefits and not pay more. It’s all about rationing health care, just as Obamacare for those under 65 is essentially about rationing—as were Bush’s proposals to expand health savings accounts (HSAs) and Bill Clinton’s health maintenance organization (HMOs) solution.

In his typical bargaining approach of ‘let’s make a unilateral offer and see what the Teapublicans do’, in recent weeks Obama has again unilaterally offered to reduce social security COLA increases that will take more than $230 billion out of the pockets of seniors. He has also proposed to introduce a means test for the wealthy, which Teapublicans will begin to extend down to the middle class. As for Medicare, watch for the Simpson-Bowles recommendations in some form to appear, likely scaled in over time. If not in the budget itself, then surely in negotiations that follow. Readers should also note that Obama last week announced higher payments to medicare health providers, while simultaneously planning in his budget cuts for seniors. But Medicare ‘cuts’ will not be mandated benefit reductions. Instead, seniors will have to pay more for the benefits they have, or opt for lower benefit coverage. Social Security Disability recipients will be also significantly impacted by the forthcoming proposals. And Republican state governors will be permitted to reduce their spending in part on Medicaid. And of course, almost certainly there will be the changes to social security: reduction of cost of living adjustments, means testing, and a raising of the eligibility age at least to 67 and later possibly even higher.
With only $1.2 more to cut in deficit spending to reach the Simpson-Bowles $4 trillion target, and Obama offering again his $600-$700 billion enticement in entitlement spending cuts, a deal is closer than ever before. Watch therefore for the full $600 billion in social security, medicare, and Medicaid to take effect, the effective date of the changes to be ‘backloaded’ in later years of the decade and certainly not before the next midterm elections in 2014.

Expect defense spending cuts of no more than half the $500 billion proposed in the sequester, and nearly all of which will be from withdrawals from middle east (Afghanistan, Iraq) operations and not equipment spending. After 2014, most will be recouped as defense spending on naval and air force equipment and operations will ‘ramp up’ for the shift of US military focus to the pacific. The Army brass had its land wars in Asia; now it’s the turn of Navy and Air Force in the pacific.

That leaves only a ‘token’ tax revenue increase of about $200 billion over the coming decade, or a paltry $20 billion a year, which will come in difficult to estimate phony tax ‘loophole’ closings. Major cuts in corporate taxes later in 2013 will not be included or ‘calculated’ in the grand bargain $4 trillion deal. In addition to big cuts in the top corporate tax rate, look for multinational corporations’ tax breaks and tax forgiveness on the $1.4 trillion they are presently sheltering in offshore subsidiaries as well. And of course small-medium business will be thrown yet another tax cut bone to buy into the deal. In exchange, the middle class will pay more in terms of limits on deductions and exemptions.

In retrospect over the past three years, and especially since November 2012 elections, the ‘grand bargain’ looks less like a bargain and more like a ‘grand collusion’ between the various parties—Teapublican, Big Corporate, Obama, and the pro-corporate wing of Democrats in Congress that have had a stranglehold on the Democratic party since the late 1980s.

This is not the Democratic Party of your grandfather that agreed to introduce Social Security in the 1930s and that proposed Medicare in the 1960s. This is the Democratic Party, and the Democratic President, that has agreed with Republicans and Corporate America to begin the repealing in stages of these very same programs—programs that are not ‘entitlements’ but are in fact ‘deferred wages’ earned by Americans over the decades that are now being ‘concession bargained’ away without any say or input. Not content with concessions from those workers still in the labor force, capitalist policymakers are intent on concessions on social wages now coming due in the form of social security and medicare benefits.

It’s not a grand bargain; it’s a charade and a ‘grand collusion’ from the very beginning from Simpson-Bowles to the present.

What Should Be Done

Writing letters to Congress won’t change anything. What is now necessary is to begin the formation nationwide of ‘Social Security-Medicare Defense Clubs’. After all, that’s how Social Security started in the first place. Neither party proposed it in the 1930s initially. In fact, Roosevelt initially publicly advocated Social Security should not be part of the New Deal. A grass roots protest, organized by the clubs forced him and the Democrats to reverse this position just before the midterm 1934 elections and support the proposal for Social Security. Now it’s time to reform the clubs to defend social security. And the first action should be to call for a million person march on Washington to reverse whatever cuts are surely forthcoming in the weeks ahead.

Jack Rasmus

Jack is the author of ‘Obama’s Economy: Recovery for the Few’, 2012, which provides a history of deficit cutting in the US and predictions of its impact. His blog is jackrasmus.com. For a video presentation on social security and medicare given recently to the Progressive Democrats of America, see his website at http://www.kyklosproductions.com/videos.html.

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Cyprus Crisis: Why the Euro Banking Crisis Will Get Worse

Posted in Uncategorized, tagged , , , , on April 7, 2013| 3 Comments »

Cyprus represents the recognition by the system’s quack policymaking physicians that more than zero interest loans and QE is now needed. The new diagnosis is the patient needs a fundamental new blood transfusion. That ‘blood’ is average depositors’ savings in the banks. Their blood (savings) must be diverted in part in order to provide a transfusion to the banking system itself. But such a medical procedure is not without its risks. That risk is called a ‘bank run’, as depositors refuse to lay down on the central bankers’ operating table and decide to take their money (i.e. life-blood savings) and run.

The significance of Cyprus is that the IMF and the European Commission together decided that a bailing out of Cyprus’ two main banks, the Laiki Bank and larger Bank of Cyprus, would require a 10 billion Euro loan to Cyprus. In exchange, the Laiki Bank would be dissolved completely, and all its depositors would thus lose all their deposited funds—i.e. an old fashioned bank collapse a la the 1930s. For the larger Cyprus bank, initially the IMF and Commission decided small ‘retail’ depositors—i.e. those with less than 100,000 Euros ($130,000) would be ‘taxed’ (i.e. expropriated) at the 6.75% rate. Larger depositors expropriated at 10%.

The 6.75% rate was a direct violation of European Union legal guarantees that deposits up to $130,000 would be insured. So much for legal protections in a banking crisis! Popular protests exploded immediately across the island nation. The initial deal collapsed. Then the cat was really let out of the bag as to what IMF and Commission were really considering. The Dutch Commission spokesman, Joeren Dijsselbloem, the following day publicly stated the Cyprus bank bailout deal would serve as a ‘template’ for future bank bailouts—presumably in the Euro periphery region like Spain, Portugal, even Italy perhaps. That’s when it ‘hit the fan’ as they say. Apparently, secret understandings by northern Europe bankers and central bankers included making ‘retail depositors’, average citizens with small deposits, pay in significant part for the bank bailouts anticipated should the Eurozone banking system continued to deteriorate.
No longer are fiscal ‘austerity’ policies to make average citizens pay (with higher taxes, less services, job cuts, pensions reductions, selling off of public assets) to bail out their governments’ debt sufficient; no longer are monetary policies of zero interest loans and QE to banks sufficient. Now households will in the future pay directly with deposit expropriations. This is a dramatic new phase in determining ‘who pays for the continuing crisis’.

Moreover, the new phase involves not only partial deposit expropriations, but subsequent ‘capital controls’ and limits on bank withdrawals of the rest of the remaining deposits as well. Withdrawal limits in the Cyprus deal were extremely strict. In effect, your remaining money in the bank was still yours, but you just couldn’t get it out except in a dribble. Furthermore, if you did get it out, you couldn’t take it out of the country. All this meant the de facto creation of a ‘two tier Euro system’, with Cyprus Euros worth less than Euros elsewhere—i.e. a de facto decline in the value of the remaining deposits and thus further losses to depositors.

A second deal was eventually made. Depositors with $130,000 or less were now exempt from the 6.75%. And those with more than $130,000 would pay more. How much more has varied according to different estimates. Some are as high as 65% in confiscated deposits.

However much more is of little matter. For deposits now will be drained almost totally from the Cyprus banking system. The banking system that remains will collapse further, requiring still more bail out loans and even more stringent terms. Money will not remain in the Cyprus banks; and money cannot leave Cyprus. It will be hoarded by depositors and businesses alike. The recession in Cyprus in the real economy will rapidly descend into a massive depression.
The greater danger of Cyprus to the Euro and global banking system is a further great loss of confidence in the banking system. The contagion will inevitably spread. Depositors in Italy, Greece, Spain, Portugal and even in northern Europe will no longer trust leaving their deposits in their banks. They will no longer trust the ‘insured deposits’ system. At the first indication of a possible major problem in a private bank—perhaps Unicredit or Monte Dei Paschi in Italy, Santander in Spain, or some Belgium or even French bank (Credit Agricole?)—depositors will not trust that a ‘secret deal’ has not been made. Deposits, lending, and money velocity will decline first in the periphery Euro economies. Perhaps a ‘three tier’ Euro currency system will emerge, with Cyprus and Greece Euros trading in the black market at a fraction of northern Europe ‘Euros’, and with Spain-Portugal Euros somewhere between.

Not just deposit security, but capital controls put in place in the final Cyprus deal will also mean greater distrust that savings might not be moveable from one Euro economy and bank to another. This will mean wealthy depositors and savers in the southern tier of the Eurozone may have a short term incentive to move their money now to northern Europe (Germany in particular) in anticipation of future capital controls.

None of this portends well for the Eurozone and UK economies already accelerating into recession throughout Europe, as a consequence of ‘Austerity’ fiscal policies and QE monetary policies, on the other hand, that only stimulate speculative investing and the profits and wealth of companies and wealthy investors.

To sum up, Cyprus represents a new desperation on the part of central bankers and capitalist policy makers in Europe. The Cyprus debt deal has backfired. It will result in less banking stability. And more real economic depression, job loss and income decline. Cyprus banks and its government will soon require even more loans. The Cyprus crisis and bailout deal will accelerate the decline in confidence in banks throughout Europe, slowly perhaps but nonetheless. Contagion is a psychological process and how and what people think (especially fear) is not easily checked by controls on cross-border flows. The contagion cannot be contained, only perhaps slowed somewhat.

(For a more detailed in depth analysis of the strategic significance of Cyprus to current capitalist policy, read this author’s forthcoming feature article in the May issue of ‘Z’ magazine, ‘Cyprus and Global Banking Instability’)

Jack Rasmus

Jack is the author of the books, ‘Obama’s Economy: Recovery for the Few’, 2012, and ‘Epic Recession: Prelude to Global Depression’ 2010. He hosts the weekly radio show, Alternative Visions, every Wednesday at 2pm est on the Progressive Radio Network. His blog is jackrasmus.com, website: http://www.kyklosproductions, and twitter handle #drjackrasmus.

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Video Presentation on Social Security and Medicare

Posted in Uncategorized, tagged , , on March 8, 2013| 3 Comments »

The following site on YouTube provides my Feb. 28 35 min. presentation to the Progressive Democrats of America on the current status of Social Security and Medicare and the growing threat by the two parties, Republicans and Democrats to institute massive cuts in both as the next phase ‘solution’ to deficit cutting. The presentation is in eight parts, and may also be accessed on Youtube by indicating ‘Jack Rasmus, Bouncing Off the Fiscal Cliff’.

The central theme is that neither social security or medicare are ‘broke’ and that very small adjustments are necessary for another century. Neither are the cause of deficits and the debt.

The following is the YouTube site, also available by indicating on youtube search, ‘jack rasmus, bouncing off the fiscal cliff’.

https://www.google.com/search?q=jack%20rasmus%2C%20bouncing&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a

THE FULL PRESENTATION, IN BOTH AUDIO AND VIDEO, IS NOW ALSO AVAILABLE ON MY WEBSITE AS FOLLOWS:

http://www.kyklosproductions.com/audiocds.html  (audio version)

http://www.kyklosproductions.com/videos.html (video version)

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Why There’ll Be No ‘Sequestration’ Deficit Deal on March 1

Posted in Uncategorized, tagged , on February 25, 2013| 2 Comments »

Tune in to my weekly radio show, ‘ALTERNATIVE VISIONS’, on the progressive radio network, this coming wednesday, February 27, 2pm New York time, where I’ll be discussing why there will be no ‘deal’ on the $85 billion in sequestered spending cuts by March 1. The cuts will go through, at least initially, resulting in more downward pressure on an already faltering US economy. Why no deal this time, when a deal was made on January 1 on the Bush tax cut extensions? What’s the role of the Business Roundtable and CEOs this time around and why is it different from January 1? What will it mean for the US economy if the cuts go through? Tune in to my show on the Progressive Radio Network at 2pm eastern time at http://prn.fm/shows/political-shows/alternative-visions/#axzz2LtaOGer1.

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A Financial Transactions Tax Alternative: Europe’s and Ours’

Posted in Uncategorized, tagged on February 22, 2013| 2 Comments »

In a recent post on Truthout, Ellen Brown wrote “How Congress Could Fix Its Budget Woes, Permanently”. The essence of her piece was why not engage in a ‘quantitative easing’ policy for households and consumers. To date, the Federal Reserve, the US central bank, has pumped more than $3 trillion directly into banks, speculators, and other investors via its 3+ ‘QE’ programs since 2009. The result has been minimal economic stimulus and growth, as banks have either sat on the cash, invested it offshore, loaned it to hedge funds and other speculators who have pumped up the stock and junk bond markets to near-bubble levels. Ellen argues why not have a populist form of QE for ‘main street’, which would jump start the real economy. Her point is of course true. Central banks can pump all the supply of money into the economy they want, but if the demand to hold cash (hoarding) exceeds that supply injection, and if the velocity of money (how fast it circulates) slows dramatically (which it has), then the negative effects of both the demand for money and velocity of money more than negate the injection of money by the central bank. So Ellen argues why not bypass the banks and investors hoarding or diverting the cash they’re given by QE and the Fed to date, and inject money into the economy directly?

Ellen Brown’s argument is economically sound. But politically not realizable for many reasons. One reason is it’s too complex an economic argument to gain the necessary support from the public, and therefore it is too easy for bankers and their media talking heads to oppose and confuse the issue with the public.

So here’s another approach that achieves the same results as Ellen proposes, and is more likely to gain broad public support and therefore is more difficult for the banksters and their friends to oppose.

I’m referring to the Financial Transaction Tax.

As this piece is being written, a fight over the same Financial Transaction Tax is raging in the European Union. It is the best political and ideological, as well as economic, tool with which to oppose the nonsenses of austerity deficit cutting that has been ravaging the Euro economies for four years now. The results of austerity ‘Euro Style’ has been an inexorable march into chronic and deepening recession throughout the Eurozone. Not only are virtually all the ‘Euro periphery’ economies—Greece, Spain, Portugal, etc.—mired in a deep recession that has characteristics of a bona fide depression, but the core Euro economies are now in recession as well. Germany in the fourth quarter has officially registered a -0.6% GDP, France a -0.3% GDP, the UK is in a triple dip recession, and so forth. Collectively the EU is an economic region about the size of the US economy, which itself recorded a -0.1% decline in the fourth quarter (until conveniently revised upward recently).

On the other side of the world, Japan recorded its third consecutive quarter of negative GDP. Its policymakers have recently responded by setting off a global currency war that will further depress the global economy. China’s GDP is officially around 7.5%, down from the 10-12% range. Actually, however, it is really around 5%, given the way China manipulates its official GDP figures. India, Brazil and other emerging economies are also slowing rapidly or in recession. In short, the world economy is clearly on a slow, but inexorable downward trajectory at present that shows all the signs of continuing—as is the US economy—much of which can be attributed to various ‘austerity’ forms of programs.

Instead of counter-posing a ‘monetarist’ approach, as Ellen Brown has proposed, I would propose a people’s ‘fiscal’ approach in the form of a robust financial transactions tax. Whether pro-Wall St. (recent QE and Fed policies) or pro-Main St. (Ellen’s proposal), monetarist policies tend not to have much impact in the end and have a much longer ‘lag time’ even if they do. Better to tax the trillions of dollars wealthy investors and their corporations are hoarding and keeping ‘on the side lines’, and for the government to directly and immediately inject the tax revenue back into the economy where it has the biggest bank for the buck. That’s where the alternative idea of a Financial Transaction Tax comes in.

A Financial Transaction Tax today is a growing reality, with significant momentum underway for such right now in Europe. A recent report summarized its development in the EU, noting that a mere 0.1% tax on stock and bond trades plus a miniscule 0.01% tax on derivative trades in just 11 countries in the EU would produce annually a roughly $47 billion in tax revenue from just the 11 economies. Those eleven regions represent an economic region about two-thirds the size of the US economy. One might therefore assume the larger European Union economy, including the UK, together about the size of the US economy in terms of GDP, might easily produce $75 billion a year from the extremely modest Euro Financial Transaction Tax.

The EU financial tax proposal is really miniscule at 0.1% and 0.01%. It is also limited to stocks, bonds and derivatives and leaves out other major financial transactions, such as foreign exchange currency trades. It is reasonable therefore to have a tax ten times that proposed in the EU. That would mean a still very modest 1% tax on stock and bond trades and a 0.1% tax on derivative trades. That would produce an annual financial tax revenue of $750 billion in the US.

If the financial transactions tax were also extended to speculative trades in foreign exchange, the biggest speculative financial market on the globe in terms of dollar value worth trillions of dollars annually, the combined result of this broad-based financial transactions tax—i.e. 1% on stocks and bonds, 0.1% on derivatives, and 1% on forex trades—would easily yield $1 trillion a year in combined new tax revenue. That’s $10 trillion over the coming decade—which retires the entire run-up of around $10 trillion in the US debt from 2001-2012 under Bush-Obama. In other words, one simple tax would resolve not only annual US budget deficit issues but wipe out the entire cumulative deficits since 2001 to date!

Tax the banksters is something the general populace can get also their heads around more easily than ‘QE for all’. ‘Make the banksters pay’ should be the thrust of recovery programs—not deficit reduction, aka ‘austerity American style’, which is still the driving policy force in Washington DC.

Banksters aren’t afraid of QEs. They love them. They’ll figure out a way to manipulate them to their further gain. A Financial Transaction Tax is another matter. That’s why the US banksters are becoming apoplectic about the developments in Europe now gaining growing public support for a financial transactions tax.

For example, the Wall St. Journal’s, February 14, lead business page article declared “U.S. Slams EU’s Tax-on-Trades Plan”. So not just the banksters themselves are seriously worried now about a financial transactions tax, but their good friends in the US Treasury have weighed in now in support of the banksters, slamming the Europeans’ idea, declaring “we do not support the proposed European financial transactions tax…because it would harm US investors”. That’s a good sign of something real happening.

As the Wall St. Journal further noted, “The potential reach of proposed (financial) taxes, and the speed at which they could spread, has caught Wall St. off guard”.

The banksters aren’t afraid of proposals for QE for main street. They know that won’t fly or that their business talk show talking heads and political friends in government can easily deflate and divert the idea. But they are terrified of the idea of a Financial Transaction Tax because of its possible public support, that could catch popular fire and spread rapidly—as evident in the idea now taking hold in Europe.

So to summarize: tax the banksters and speculators with 1% on all stocks and bond trades, 0.1% on all derivatives trades, and 1% on all foreign exchange trades—and thereby raise $1 trillion in new revenue per year. Discontinue all the current nonsense about deficit cutting and even raising other forms of new tax revenue. All that’s needed is a real Financial Transactions Tax. The banksters and speculators aren’t spending the $13 trillion they’ve been given by the Federal Reserve since 2008 on jump-starting the US economy anyway. Monetary policies don’t work for anyone but the banksters. So let’s tax the SOBs and all those speculators now pumping up the stock and junk bond markets, creating the new financial bubbles of tomorrow in stocks, junk bonds and derivatives that will inevitably lead to another financial crash well before the end of this decade—a crash that will make 2007-08 pale in comparison.

Jack Rasmus

Jack is the author of “Obama’s Economy: Recovery for the Few”, 2012, Palgrave and Pluto press. His website is: http://www.kyklosproductions.com; he blogs at jackrasmus.com and his twitter account is #drjackrasmus.

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AMERICA’s TEN CRISES, Part 10-Growing Income Inequality

Posted in Uncategorized, tagged , , on February 20, 2013| 1 Comment »

(The following is an excerpt from this writer’s forthcoming, March 2013 ‘Z’ Magazine article, ‘Income Inequality and Double Dip Recession’. For a complete version, see ‘Z’ Magazine).

The dominant characteristic of the US economy today—and a fundamental cause of the faltering, stop-go economic recovery in the U.S. since 2009—is the long term and continuing growth of income inequality in America.
Income inequality in the US is not only growing, but growing at an accelerating rate. What follows is a detailed accounting of the dimensions of the growing income inequality in the US, and some of the more important reasons for that continuing, and now accelerating, income shift. Growing income inequality—approaching now obscene levels—is not simply a ‘moral outrage’. It not only represents a gross violation of historically held American values or reasonable equality for all. It is a condition that has served, and continues to serve, as a major cause of the lack of sustained economic recovery in the US now for five years—as well as a major factor in explaining why the US continues today to drift toward another ‘double dip’ recession.

Median Real disposable household income has been declining steadily over the long term since 2000 and that decline has accelerated since 2008, at a rate between 1-2% per year. With consumption constituting 70% of the US economy, spending by 100 million wage earning households in the US (bottom 80%) has limped along based increasingly on debt spending, more credit card usage, more withdrawals from 401k and savings accounts, and more part time second job employment. Recent data show more than 50% of all 401k withdrawals, which are rising rapidly, are withdrawn just to pay monthly bills. Auto, student and installation debt continues to accelerate. Part time jobs have increased nearly five-fold since 2008. Meanwhile, corporations sit on more than $2 trillion in cash and justify their hoarding, instead of investing and creating jobs, referring to the lack of household consumption for their goods and services as main reason for their reluctance to invest and create jobs. The US economy limps along in a ‘stop-go’ trajectory, and most recently ‘stop’ instead of ‘go’ as government and business continue to cut spending.

The Wealthiest 1% Households Historic Income Gains

That inequality is most dramatically represented by the growth in the share of national income by the wealthiest 1% of households, on the one hand, and the decline in the share of national income for the bottom 80% and remaining 110 million plus US households, on the other—i.e. between those earning an average of $593,000 a year (top 1%) and those earning less than $118,000 a year (bottom 80%) with a median annual income of around $50,000.

With average annual incomes of $593,000 a year today, the wealthiest 1% of households in the U.S.—approximately 750,000 out of a total of more than 150 million families in the U.S.—receive about 24% of all income generated in the US every year, according to Nobel Prize winning economist, Joseph Stiglitz. That’s up from only 8% of total income in 1979. That’s a tripling of the wealthiest 1%’s annual share of total income over the last three decades since Ronald Reagan took office. Not since 1928, when the wealthiest 1% share of income reached 22%, has income inequality been as extreme as today. And income inequality continues to grow worse at an accelerating rate.

According to studies of IRS data by University of California economist, Emmanuel Saez, and others, during the Clinton years, 1993-2000, the wealthiest 1% households captured 45% of all the increase in US income growth. During the George W. Bush years, 2000-2008, they captured 65%. And in the latest year of available data, 2010, they captured 93%. So the top 1% recovered quickly from the recession. So did their corporations, from which the same 1% households obtain more than 90% of all their income in the form of capital gains, dividends, interest, rents, and other forms of ‘capital incomes’.

Corporate Profits and the 1%

Profits are the major conduit through which the wealthiest 1% incomes grow, redistributed to stockowners, bondholders, and senior executive managers in the form of capital incomes like capital gains, dividends, interest, rents, etc. And Corporate Profits have done extremely well the past three decades, since 2001 in particular, and especially since the Great Recession of 2007-09.

After three years of recession, by 2011 corporate profits in the US were higher than even in 2007 just before the Great Recession began, rising at the fastest rate in 31 years during the recession and immediately after in 2010-11.
Averaging an annual rate of increase of about 10% from 1948-2007, Pre-Tax Corporate profits virtually doubled from their recession 2008 low-point of $971 billion to $1.876 trillion by March 2011 less than a year and a half later—i.e. a level 28% higher than even their 2007 pre-recession record high of $1.460 trillion.

A subset of the $1.876 trillion, i.e. profits of the 500 largest US corporations, rose 243% in 2009-10 according to the Wall St. Journal. That’s 243% after averaging 10% a year during 1998-2007. Moreover, that 243% does not include profits of multinational US corporations hidden and sheltered in their offshore subsidiaries, which in 2012 were estimated at more than $1.4 trillion.

This record gain in pre-tax corporate profits since the onset of the economic crisis in 2007-08 was achieved not from the increased sale of goods and services, but from record profit margins from cost-cutting operations—i.e. by cutting jobs, by reducing wages, benefits, and hours of work, and by productivity gains pocketed by management and not shared with their workers. Profit margins since 2008, i.e. profits as a percent of operating costs, by 2011 thus attained the highest levels in more than 80 years.

Just as cost-cutting at the direct expense of workers has been the main factor in generating record pre-tax corporate profits, so too have Corporate After-Tax profits surged as a consequence of massive corporate tax cutting by governments at all levels, Federal as well as State and Local.

Major corporate tax cut legislation in 2004-05, new rules allowing faster depreciation write-offs (a form of tax cut), and disregard of enforcing the foreign profits tax under George W. Bush all resulted in a further surge in corporate after-tax profits in Bush’s second term, 2004-08. That was followed by hundreds of billions more in business tax cuts at the Federal level under Bush and Obama from 2008 through 2012.

State and local government taxes on business since 2008 have been falling especially fast, as a December 1, 2012 feature article by Louis Story in the New York Times abundantly pointed out. That article estimated the cost of business tax cuts to by State and Local governments at no less than an additional $70 billion a year not represented in the above profits figures.

As a result of the continuing corporate tax cuts since 2008 at all levels of government, Corporate After-Tax profits recovered even faster during the recent recession than did pre-tax corporate profits. From a 2008 low-point of $746 billion, in less than 18 months from the recession low, after tax profits rose to $1.454 trillion—i.e. a level of 47% higher than even their 2007 pre-recession record of $989 billion. In other words, after tax profits recovered twice as fast as pre-tax profits as a direct consequence of government business tax cutting during the recent recession.

Corporate cost cutting at the direct expense of labor resulted in record corporate pre-tax profits during the last decade and especially since 2008. Three decades of corporate tax cutting—intensifying since 2001 and continuing through the recent recession—resulted in even greater after-tax profit gains. But as corporate tax cutting has intensified so too has the cutting of taxes on recipients of capital incomes—i.e. capital gains, dividends, interest, rents, etc.

The Personal Income Tax has concurrently been reduced for the wealthiest 1% households, enabling the ‘pass through’ of ever larger magnitudes of corporate after-tax profits to the wealthiest 1% and permitting that 1% to retain ever greater amounts of those distributed corporate profits as a result of accompanying reductions in the personal income tax.

The reductions in the Personal Income Tax have occurred in various forms: the lowering of the top marginal tax rates, the raising of the income threshold at which the top marginal rates would apply, the reducing of capital gains and dividends tax rates even faster than for other forms of income of the wealthiest 1%, introduction of new forms of interest income taxed at lowest rates (e.g. carried interest), the IRS benign neglect of offshore tax sheltering by the wealthy, the proliferation of countless income tax loopholes benefiting the wealthy too numerous to recount.
The outcome has been the shift in income to the top 1%, from 8% in 1979 to the estimated 24% share of national income in 2012.

Income Decline for the Bottom 80%

But income inequality is a consequence not only of income shifting to the wealthiest households and their corporations. Income inequality is a ‘double edged’ sword. It is also the consequence of conditions and policies which have simultaneously reduced the real incomes of the bottom 80% households—i.e. those 110 million earning less than $118,000 annual income and most of whom earn less than $50,000—while simultaneously raising the incomes of the wealthiest and their corporations. Once again the nexus is Corporate America.

Policies and measures that have raised corporate profits in the US to record levels over the past three decades, and especially since 2001, are in many instances the same policies that have reduced income for the middle and working classes in America. A short list of the major causes would include:

1. De-unionization of much of the labor force and a consequent collapse in the union-nonunion wage differential
2. Free trade policies that have lowered wages for new export companies by 20% compared to higher paid jobs lost to imports.
3. Millions of jobs permanently lost to free trade from NAFTA, CAFTA, and others
4. Offshoring of high paying jobs by multinational corporations to Asia and beyond
5. Creation of a 40 million two-tier workforce of part time and temp workers, with 60% wages and virtually no benefits
6. Elimination of health care benefits for tens of millions, and reduction in benefit coverage and higher cost sharing for those remaining with benefits
7. Longer duration between adjustments of minimum wage legislation, and smaller progressive adjustments when they occur
8. Rising base level of unemployed as recessions occur more frequently, are deeper and longer in duration, resulting in job recovery longer and at lower pay
9. Management hoarding of all productivity gains without sharing in part with wages
10. Elimination of defined benefit pensions and replacement with minimal 401k plans
11. Exemption by government rule changes of millions of workers from eligibility for overtime pay
12. Rise in property tax, sales taxes, and other local government fees and charges as local government grants more and more tax cuts to corporations and businesses.
13. Indexation and rise in payroll tax contributions by workers
14. Reduction in paid leave time for vacations, holidays, sick leave, etc.

These and scores of other measures have resulted in a concurrent decline in working and middle class income, as profits of Corporations and income from capital simultaneously have risen. The heaviest impact has been on working class households earning annual income from $39,000 to $118,000 a year—virtually all of which is wage income—sometimes called the middle class.

According to the PEW Institute’s 2012 study, the share of total income for those households in that annual income range declined from 58% in 1983 to 45% in 2011. So what the top 1% households gained (16% share increase, from 8% to 24%), the middle class largely lost (13% share decline from 58% to 45%). In terms of wealth estimates, the middle class has lost 28% of its wealth in just the last two decades, whereas the top1% share of wealth has risen from 27% to 40%. The size of the middle class itself has declined, shrinking from 61% of adults in the US population at its peak to only 51% today.

The decline in income and wealth has been long term, increasing noticeably since 1980, accelerating since 2001, and continuing through the recent recession to the present day. Since 2008, households without a 4 year college education have been especially hard hit, with a significant -9.3% income decline at the median in less than four years. Older workers, age 55-64, and younger workers, age 25-34, have been similarly hard hit in terms of income decline; the former a -9.7% drop and latter a -8.9% drop. Even college degreed workers’ income has fallen by -5.9% since the so-called end of the recent recession in June 2009.

While some of the income decline is due to wage and benefit reductions by those who did not lose their jobs during the recent recession, much more of the relative income decline has been due to massive loss of jobs since 2007, which reached a level of 27 million at one point and still remain at 22 million after four years of so-called recovery. While more than 15 million jobs were lost, no more than 5 million have been ‘recovered’ since the recession began. Moreover, the jobs added during the recession have paid significantly less than the jobs lost, thus lowering income accordingly. According to a National Employment Law Project survey published in August 2012, 60% of the jobs lost during the recession were higher paying construction, manufacturing, and tech jobs, ranging between $13.84-$21.13 per hour. But only 22% of the jobs added since 2008 were in this range. In contrast, 21% of the jobs lost after 2008 were low paying, $7.69-$13.84, but the latter have been 58% of the jobs added during the recession. And the problem is not only short term and recession related. Since 2001, low wage jobs have grown 8.7% while higher wage jobs have decline -7.3%.

In summary, while corporate profits have continued to grow so too has the income of the top 1 wealthiest households. This has been made possible in large part at the expense of the middle and working classes, as rising corporate profits gained at workers’ expense are passed through to forms of capital incomes—the latter process accelerated by the reduction in both corporate taxation and personal income taxation for the wealthiest 1% households. The process began in earnest more than three decades ago under Reagan, continued under Clinton, accelerated under George W. Bush, and has remained under Obama during his first term. The consequence has been the growing—and accelerating—income inequality in America which is a major characteristic of the US economy in the 21st century.
It also explains in large part why the current US economic recovery has repeatedly relapsed on three different occasions since the formal end of the recession in June 2009, and will continue to do so in the future. While corporations, bankers, speculators, stock and bond traders, and the wealthiest households continue to experience significant long term income gains and have recovered years ago from the 2007-09 economic contraction, the rest of the populace remains plagued by an economy that has been simply ‘bouncing along the bottom’ now for four years.

Jack Rasmus

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US GDP and the GLOBAL ECONOMIC SLOWDOWN

Posted in Uncategorized, tagged , , on February 15, 2013| 1 Comment »

The following is the Introduction to the full length article, US GDP and the GLOBAL ECONOMIC SLOWDOWN, that can be accessed and read in full on my website, http://www.kyklosproductions.com, accessible from the toolbar on the right side of this blog site.

INTRODUCTION:

Economic data reported in recent weeks show the global economy is slowing rapidly across all segments. Nearly the entire European Union, including its core economies of Germany, France, and the United Kingdom are all now clearly mired in recession. The Euro southern periphery is in a bona fide depression. Japan has entered its third recession since 2008. China, India, and Brazilian growth rates have fallen by half. And the US in the fourth quarter 2012 has come to a virtual economic standstill, the second time in two years in which a quarterly GDP recorded virtually no growth.

One consequence of the now clearly emerging new crisis is the global economy finds itself on a ‘tipping point’ and on the verge of a renewed ‘currency war’ that was temporary averted in 2010-11. Competitive currency devaluations are a sure sign of a qualitatively deteriorated economic state of affairs. During the global depression of the 1930s ‘devaluation by fiat’ played a key role in deepening and ensuring the duration of the depression. In 2010-11 the then incipient drift toward currency war took the form of driving down wages to gain a cost advantage for export sales. Today the driver is global quantitative easing, QE, policies that have been implemented and are intensifying by central banks around the world, from the US Federal Reserve, the Bank of England, the European Central Bank, Bank of China, and most recently, the Bank of Japan.

Capitalist policy makers globally have bought into the false idea that monetary policy—i.e. injecting massive amounts of liquidity into their respective banking systems—will stimulate recovery. Historically this has never worked, and it has not been working as well since 2008. Injecting money into banks, shadow banks, and speculators have resulted only in creating incipient bubbles in the stock markets, junk bond markets, and other financial securities. The real economies have benefited little if any from this form of stimulus.

Believing QE is the answer to recovery, the same policy makers have opted for a severe contractionary fiscal policy in the form of ‘austerity’ programs—massive cuts in public spending, mass layoffs and privatization in the public sector, and tax hikes on the middle class to offset the anticipated inflationary effects of the QE and money stimulus—inflation which has not appeared as deflationary forces continue to grow as the real economies of their countries continue to slow and stagnate. The dual strategy of capitalists politicians across the globe—of QE and money injections into the banks and financial system combined with austerity for the rest—has clearly failed and will continue to fail even more visibly.

Meantime, the global economy continues inexorably to slow, drifting toward the ‘double dip’ recession this writer has predicted on various occasions in the recent past, in my 2010 and 2012 published books (Epic Recession: Prelude to Global Depression, 2010, and Obama’s Economy: Recovery for the Few, 2012) and numerous articles in ‘Z’ magazine and elsewhere.

The locus of the debate on the near-term economic future in the US economy is now concentrated on whether the recent 4th quarter US GDP , which fell to -0.1%, is just an aberration and will be reversed in the first half of 2013 or whether it is a harbinger of a further slowdown. This writer’s view is that it is the latter, as has been predicted in a series of analyses of US GDP over the past five quarters, from the last quarter of 2011 through the last quarter of 2012’s recent GDP data.

Data now coming in for the US show that consumer spending on the holidays was noticeably weak except for auto sales driven by discounts. It is now weaker in 2013, as payroll taxes have risen, health insurance companies are gouging households with premium increases of 10-20%, gasoline prices are rising rapidly once more, and real disposable household income for 80% of families continues to decline. On the business spending side, business inventory accumulation is slowing rapidly, small business confidence is falling, forecasts of business operating revenue show a major slowing, productivity is collapsing, and export sales will decline as the currency war drives up the value of the US dollar in global markets. The remaining ‘engine’ of GDP, government spending, is also in reverse as the debates on ‘fiscal cliff: Parts 2 and 3’ and federal spending cuts continue and the states and cities continue to reduce spending and raise taxes. Nevertheless, polyannish mainstream economists continue to predict a rapid recovery from the 4th quarter GDP collapse into 2013—as they have erroneously for four years now.

What follows is this writer’s analyses of the details of GDP results for the past 15 months, that were published on his blog, jackrasmus.com, and other public blogs. The reports are in reverse chronological order, with the latest 4th Quarter 2012 US GDP first, followed by consecutive past quarters, concluding with the analysis of the 4th quarter 2011 GDP.

(go to the website, http://www.kyklosproductions.com, and click on the ‘articles’ tab on the top toolbar of the website.)

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Obama’s 2013 State of the Union Address: Tragedy Has Many Faces

Posted in Uncategorized, tagged on February 13, 2013| 1 Comment »

Tonight, February 12, 2013, President Obama delivered his State of the Union address. He concluded with an emotional appeal for gun control, repeating a call for Congress to at least put the matter of gun control to a vote after referencing the Newtown, Ct., tragic massacre of 26 children and other recent acts of gun violence in the US. It was an emotional high point of his address, and a very moving moment.

But there was another reference in his speech that also addressed life and death matters, potentially impacting not 26 but hundreds of thousands of those other of America’s most vulnerable—our senior population.

Earlier in his address, Obama declared “the biggest cause of the nation’s long term debt” was “medical for the aged”, in other words, Medicare. Saying this, Obama repeated his remarks of January 1, 2013, when he publicly declared on TV, while supporting the agreement in Congress to raise token taxes on the wealthiest 1%, that Medicare was the biggest contributing source to the deficit and debt.

Reference to Medicare as the main cause of deficit and debt is of course blatantly false. As this writer has documented elsewhere in detail in several articles, the main causes of the $10 trillion additional run-up in deficits and debt since 2001 have been the Bush tax cuts ($3.4 trillion of the total), excess inflationary war spending ($2.1 trillion), tax cuts for the rich and corporations and other stimulus spending since 2008 ($3 trillion), and loss of tax revenue due to 5 years of more than 20 million still unemployed.

Obama’s fixation on Medicare as the prime target for deficit cutting is therefore disturbing. All the more so since he’s been calling for massive Medicare cuts for the past two years. To recall, last November he proposed $340 billion in Medicare cuts. And in July 2011 proposed $700 billion as part of a ‘grand bargain’. Massive cuts to Medicare have been on his mind for some time. But even more disturbing in his February 12 address was his statement that he agreed with and supported the Simpson-Bowles Deficit Commission’s 2010 proposals for cutting Medicare.

If you don’t know what Simpson-Bowles proposed back in November 2010 for reducing Medicare, allow me to enlighten you. Simpson-Bowles proposed a new $550 annual deductible for Part A (hospital) and Part B (physician) Medicare coverage. In addition to that $550, they also proposed that seniors now pay a 20% copay for Part A coverage as well as the present 20% copay for Part B coverage. Those seniors who can afford it, currently purchase additional supplemental private insurance to cover the 20% Part B copay. That typically costs from $150 to $300 a month. Presumably, the additional 20% copay for Part A would cost about the same additional $150 to $300 a month. So to keep their current part A hospital coverage they now have, seniors would have to pay out of pocket another $150 to $300 a month—in addition to the new $550 deductible for Part A & B.

The Simpson-Bowles proposal for Medicare means seniors will pay an additional $195 to $345 a month out of pocket for the same level of Part A and Part B coverage they now have.

The new $550 deductible means another $45 a month taken out of their monthly social security retirement checks, in addition to the current roughly $105 a month taken out for Part B coverage. That’s a major hit to monthly retirement checks from social security, which today averages only a mere $1100 a month. Plus the $150-$300 directly out of pocket for supplemental Part A insurance.

In short, that’s Simpson-Bowles. That’s what Obama called for. And that’s a financial disaster for tens of millions on Social Security-Medicare.

The other tragedy in Obama’s SOTU address was jobs. The proposals raised were rehashed old programs, like his September 2011 ‘jobs’ bill; more subsidies and tax breaks for multinational corporations and manufacturers; a token infrastructure spending proposal with no details; and a pre-school education proposal that was strangely offered as the first step toward a ‘job retraining’ bill.

The President also called for an Immigration bill, much needed no doubt. But that bill is currently being drafted in part by business interests, multinational tech companies in particular. As part of the immigration deal, multinational tech companies will be allowed to double the quota of jobs given to foreign skilled engineers from their offshore subsidiaries, raising the annual total of jobs under the H1-B visa program from current 65,000 to 130,000. So jobs will be created by the immigration bill, but not for American college youth, who are now being crushed under a mountain of student debt with little guarantee of a high paying job upon graduation. (And instead of expunging that debt in whole or part, as has been done for the banks these past five years, the President merely exhorted colleges and universities to stop raising annual tuition by double digit rates).

But the real jobs tragedy was President Obama’s proposal to conclude the nearly completed ‘Transpacific Partnership Program’—a euphemism for a pacific wide Free Trade on Steroids treaty that will dwarf the job loss impact of NAFTA since 1994 and preferred trade rights given to China since 2000. Those two major trade deals cost, at minimum, 5 million lost jobs. TPP will cost magnitudes more in terms of job loss. And that’s not all. Obama further called for replicating TPP Free Trade with a similar treaty with the European Union, a ‘TransAtlantic Partnership Program’, or TAP.

In summary, the State of the Union address last night, February 12, was proof, once again, that everything changes but nothing changes with the two parties in Washington. There is still no serious job creation program, only more free trade job destruction proposals and still more subsidies to multinationals and manufacturers. Meanwhile, if you’re long term unemployed and older than five years old, forget about job retraining. And if you’re a senior, expect to foot much of the deficit cutting bill through higher out of pocket payments for Medicare and thus fewer dollars in your social security retirement checks. And if you’re a student, expect to have to continue to pile on more debt in exchange for low paying service jobs when they graduate.

Dr. Jack Rasmus
February 12, 2013
Jack is the author of the 2012 book, “Obama’s Economy: Recovery for the Few”, published by Palgrave-Macmillan and Pluto press. His website is: http://www.kyklosproductions.com; his blog is: jackrasmus.com; and he can be reached on twitter at #drjackrasmus.

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‘Incomes, Jobs, and Obama’s 2013 State of the Union Address’

Posted in Uncategorized, tagged , , , , , on February 11, 2013| 1 Comment »

On Tuesday, February 12, 2013, President Obama will give his State of the Union address. Previews from the media in recent days indicate he will talk about job creation and the problem of income stagnation for the middle class. Neither of these issues—jobs and income—have been seriously addressed for more than five years since the start of the recent recession in December 2007. More than 20 million workers remain jobless and real income for middle class families has fallen, and continues to fall, for the past five years according various measures.

It is rumored Obama will call for a massive increase in Free Trade, specifically for a pacific-wide free trade agreement, the ‘Trans Pacific Partnership’ agreement that his representatives have been working on already for more than a year. Also in the works is a parallel Free Trade agreement with the entire European Union. If passed, these agreements will result in millions more lost jobs—not new jobs—and will make the more than 5 million jobs already lost to NAFTA free trade and China preferred trade pale in comparison. But it will be passed off as a ‘job creator’.

With regard to domestic job creation, it is rumored he will call for business to invest more in the US in order to create jobs here. It is not likely, however, the President will bother to mention the more than $2 trillion in cash US corporations are sitting on—or distributing to their stockholders to the tune of $500 billion last year—instead of creating jobs. Nor is it likely the President will mention that, according to latest Wall St. Journal surveys, big businesses plan to increase investment in 2013 by a mere 2%, down from 8% in 2012 and 20% in 2011. He will exhort them to do something more about investing and job creation, without saying what he himself will do if Business continues to sit on its massive cash hoard and lower investment still further.

The reason most frequently given by CEOs for not investing more in the US is that US consumers aren’t buying enough. True enough. Except for the wealthiest 10% households, median family consumer spending is lagging badly. Most of median household spending that is occurring is spending on credit—credit cards, installment loans, student loans—or spending from depletion of savings to cover escalating healthcare costs. Consumer spending based on real income gains is just not happening for the middle class. And that picture is about to get seriously worse very quickly in coming weeks, given the recent run-up in gas prices that will almost certainly exceed $5 a gallon this spring.
But Obama will talk about the need for income gains for the middle class, while remaining short on the specifics how that will occur; he’ll talk about the need for more jobs without offering specific programs except for more job-destroying free trade agreements. And while he’ll reference the key problem of falling real middle class incomes, specific solutions he plans will be conspicuously absent.

How important is the fact of stagnating and/or declining middle class incomes? The following are some of the more salient facts about income inequality trends in the US in recent decades and years; why those trends are growing worse; and why that inequality is a major factor in the now stagnating once again US economy and recovery.

The Wealthiest 1% Households Historic Income Gains

The dominant characteristic of the US economy today—and a fundamental cause of the faltering, stop-go economic recovery in the U.S. since 2009—is the long term and continuing growth of income inequality in America.
That inequality is most dramatically represented by the growth in the share of national income by the wealthiest 1% of households, on the one hand, and the decline in the share of national income for the bottom 80% and remaining 110 million plus US households, on the other—i.e. between those earning an average of $593,000 a year (top 1%) and those earning less than $118,000 a year (bottom 80%) with a median annual income of around $50,000.

With average annual incomes of $593,000 a year today, the wealthiest 1% of households in the U.S.—approximately 750,000 out of a total of more than 150 million families in the U.S.—receive about 24% of all income generated in the US every year, according to Nobel Prize winning economist, Joseph Stiglitz. That’s up from only 8% of total income in 1979. That’s a tripling of the wealthiest 1%’s annual share of total income over the last three decades since Ronald Reagan took office. Not since 1928, when the wealthiest 1% share of income reached 22%, has income inequality been as extreme as today. And income inequality continues to grow worse at an accelerating rate.

According to studies of IRS data by University of California economist, Emmanuel Saez, and others, during the Clinton years, 1993-2000, the wealthiest 1% households captured 45% of all the increase in US income growth. During the George W. Bush years, 2000-2008, they captured 65%. And in the latest year of available data, 2010, they captured 93%. So the top 1% recovered quickly from the recession. So did their corporations, from which the same 1% households obtain more than 90% of all their income in the form of capital gains, dividends, interest, rents, and other forms of ‘capital incomes’.

Corporate Profits and the 1%

Profits are the major conduit through which the wealthiest 1% incomes grow, redistributed to stockowners, bondholders, and senior executive managers in the form of capital incomes like capital gains, dividends, interest, rents, etc. And Corporate Profits have done extremely well the past three decades, since 2001 in particular, and especially since the Great Recession of 2007-09.

After three years of recession, by 2011 corporate profits in the US were higher than even in 2007 just before the Great Recession began, rising at the fastest rate in 31 years during the recession and immediately after in 2010-11.
Averaging an annual rate of increase of about 10% from 1948-2007, Pre-Tax Corporate profits virtually doubled from their recession 2008 low-point of $971 billion to $1.876 trillion by March 2011 less than a year and a half later—i.e. a level 28% higher than even their 2007 pre-recession record high of $1.460 trillion.

A subset of the $1.876 trillion, i.e. profits of the 500 largest US corporations, rose 243% in 2009-10 according to the Wall St. Journal. That’s 243% after averaging 10% a year during 1998-2007. Moreover, that 243% does not include profits of multinational US corporations hidden and sheltered in their offshore subsidiaries, which in 2012 were estimated at more than $1.4 trillion.

This record gain in pre-tax corporate profits since the onset of the economic crisis in 2007-08 was achieved not from the increased sale of goods and services, but from record profit margins from cost-cutting operations—i.e. by cutting jobs, by reducing wages, benefits, and hours of work, and by productivity gains pocketed by management and not shared with their workers. Profit margins since 2008, i.e. profits as a percent of operating costs, by 2011 thus attained the highest levels in more than 80 years.

Just as cost-cutting at the direct expense of workers has been the main factor in generating record pre-tax corporate profits, so too have Corporate After-Tax profits surged as a consequence of massive corporate tax cutting by governments at all levels, Federal as well as State and Local.

Major corporate tax cut legislation in 2004-05, new rules allowing faster depreciation write-offs (a form of tax cut), and disregard of enforcing the foreign profits tax under George W. Bush all resulted in a further surge in corporate after-tax profits in Bush’s second term, 2004-08. That was followed by hundreds of billions more in business tax cuts at the Federal level under Bush and Obama from 2008 through 2012.

State and local government taxes on business since 2008 have been falling especially fast, as a December 1, 2012 feature article by Louis Story in the New York Times abundantly pointed out. That article estimated the cost of business tax cuts to by State and Local governments at no less than an additional $70 billion a year not represented in the above profits figures.

As a result of the continuing corporate tax cuts since 2008 at all levels of government, Corporate After-Tax profits recovered even faster during the recent recession than did pre-tax corporate profits. From a 2008 low-point of $746 billion, in less than 18 months from the recession low, after tax profits rose to $1.454 trillion—i.e. a level of 47% higher than even their 2007 pre-recession record of $989 billion. In other words, after tax profits recovered twice as fast as pre-tax profits as a direct consequence of government business tax cutting during the recent recession.

Corporate cost cutting at the direct expense of labor resulted in record corporate pre-tax profits during the last decade and especially since 2008. Three decades of corporate tax cutting—intensifying since 2001 and continuing through the recent recession—resulted in even greater after-tax profit gains. But as corporate tax cutting has intensified so too has the cutting of taxes on recipients of capital incomes—i.e. capital gains, dividends, interest, rents, etc.

The Personal Income Tax has concurrently been reduced for the wealthiest 1% households, enabling the ‘pass through’ of ever larger magnitudes of corporate after-tax profits to the wealthiest 1% and permitting that 1% to retain ever greater amounts of those distributed corporate profits as a result of accompanying reductions in the personal income tax.

The reductions in the Personal Income Tax have occurred in various forms: the lowering of the top marginal tax rates, the raising of the income threshold at which the top marginal rates would apply, the reducing of capital gains and dividends tax rates even faster than for other forms of income of the wealthiest 1%, introduction of new forms of interest income taxed at lowest rates (e.g. carried interest), the IRS benign neglect of offshore tax sheltering by the wealthy, the proliferation of countless income tax loopholes benefiting the wealthy too numerous to recount.

The outcome has been the shift in income to the top 1%, from 8% in 1979 to the estimated 24% share of national income in 2012, and the accelerating accrual of all income gains by the top 1% noted previously in the opening paragraphs of this essay.

Income Decline for the Bottom 80%

But income inequality is a consequence not only of income shifting to the wealthiest households and their corporations. Income inequality is a ‘double edged’ sword. It is also the consequence of conditions and policies which have simultaneously reduced the real incomes of the bottom 80% households—i.e. those 110 million earning less than $118,000 annual income and most of whom earn less than $50,000—while simultaneously raising the incomes of the wealthiest and their corporations. Once again the nexus is Corporate America.

The heaviest impact has been on working class households earning annual income from $39,000 to $118,000 a year—virtually all of which is wage income—sometimes called the middle class.

According to the PEW Institute’s 2012 study, the share of total income for those households in that annual income range declined from 58% in 1983 to 45% in 2011. So what the top 1% households gained (16% share increase, from 8% to 24%), the middle class largely lost (13% share decline from 58% to 45%). In terms of wealth estimates, the middle class has lost 28% of its wealth in just the last two decades, whereas the top1% share of wealth has risen from 27% to 40%. The size of the middle class itself has declined, shrinking from 61% of adults in the US population at its peak to only 51% today.

The decline in income and wealth has been long term, increasing noticeably since 1980, accelerating since 2001, and continuing through the recent recession to the present day. Since 2008, households without a 4 year college education have been especially hard hit, with a significant -9.3% income decline at the median in less than four years. Older workers, age 55-64, and younger workers, age 25-34, have been similarly hard hit in terms of income decline; the former a -9.7% drop and latter a -8.9% drop. Even college degree workers’ income has fallen by -5.9% since the so-called end of the recent recession in June 2009.

While some of the income decline is due to wage and benefit reductions by those who did not lose their jobs during the recent recession, much more of the relative income decline has been due to massive loss of jobs since 2007, which reached a level of 27 million at one point and still remain at 22 million after four years of so-called recovery. While more than 15 million jobs were lost, no more than 5 million have been ‘recovered’ since the recession began. Moreover, the jobs added during the recession have paid significantly less than the jobs lost, thus lowering income accordingly. According to a National Employment Law Project survey published in August 2012, 60% of the jobs lost during the recession were higher paying construction, manufacturing, and tech jobs, ranging between $13.84-$21.13 per hour. But only 22% of the jobs added since 2008 were in this range. In contrast, 21% of the jobs lost after 2008 were low paying, $7.69-$13.84, but the latter have been 58% of the jobs added during the recession. And the problem is not only short term and recession related. Since 2001, low wage jobs have grown 8.7% while higher wage jobs have decline -7.3%.

In summary, while corporate profits have continued to grow so too has the income of the top 1 wealthiest households. This has been made possible in large part at the expense of the middle and working classes, as rising corporate profits gained at workers’ expense are passed through to forms of capital incomes—the latter process accelerated by the reduction in both corporate taxation and personal income taxation for the wealthiest 1% households. The process began in earnest more than three decades ago under Reagan, continued under Clinton, accelerated under George W. Bush, and has remained under Obama during his first term. The consequence has been the growing—and accelerating—income inequality in America which is a major characteristic of the US economy in the 21st century.

But don’t expect to hear anything specific or concrete from the President how he proposes to reverse the continuing deterioration in middle class income. What he’ll likely say is you don’t have enough income because you don’t have enough education, so go out and get more and take on even more student debt. And he’ll say the way to stimulate investment and jobs is to pass more Free Trade treaties that will destroy millions more jobs. Or pass the Immigration bill, much of which is being drafted right now by big tech companies to ensure they can hire hundreds of thousands more H-1B visa workers from their offshore subsidiaries. Or propose to create ‘green’ jobs by giving the ‘greenlight’ to natural gas fracking and pipeline construction throughout the US. But none of that will solve the problem of more than 20 million still jobless, or the fact that jobs that have been created are low pay, part time, temp, non-union service jobs with little or no benefits—that is, jobs that do little to resolve the even deeper problem of stagnating middle class incomes.

Jack Rasmus
February 11, 2013

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Defense Cuts and the March 1 Sequester Deadline

Posted in Uncategorized, tagged on February 10, 2013| Leave a Comment »

Tune into my upcoming Wednesday, February 13 radio show, ‘Alternative Visions’, on the Progressive Radio Network, 2pm eastern time, at http://prn.fm/shows/political-shows/alternative-visions/#axzz2KZKa7AQX.

I and my guests (Mike Eisenscher of US Labor Against War & Mike Prokasch of the New Priorities Movement) will be discussing the current maneuvers in Washington by Teapublicans and Timidcrats to delay and decrease the scheduled Defense Spending cuts due March 1 as part of the 2011 $1.2 trillion sequestered deficit cuts. Hear what others are doing to oppose the emerging deals by politicians in DC to reduce or even eliminate the Defense cuts, and what you can do to help as well. Fewer defense spending cuts now mean more non-defense (medicare, education, etc.) spending cuts later.

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